Building an International Bond Portfolio

We started by helping him understand the various options…

… the asset classes available …

… the (domestic and international) structures on offer …

… and the way in which the assets are accessed depending on the chosen structure.

He eventually decided to keep things as simple as possible and start with a managed investment account tied to a bank account at a private institution.

(At which point, we referred him to an advisor licensed to give investment advice to US clients, as per SEC rules.)

One thing Earl brought up – and which inspired me to write this article – is the practical side of how foreign assets are accessed by US clients.

We call that the “platform”.

When you first start looking to diversify out of the dollar, you’ll quickly learn how important this piece actually is. In my view, it’s a big reason clients work with us in the first place.

Because finding someone to take your business can be very frustrating. Most international financial folks – the platform providers – aren’t interested in US clients.

Things go a lot more smoothly when we’re involved because we already know all the platforms. After weeks or even months of effort, clients are sometimes shocked to see us find them a solution with just a few emails and a phone call or two.

(It probably also helps that, for most clients, after an initial flat-fee planning engagement, we’re happy to work on commission.)

But what causes this rejection? Why don’t foreign firms want to take on US clients?

For that, we need to take a quick step back.

Until about 15 years ago or so, there were many platforms available to US clients. But with the passing of a law called the Foreign Account Tax Compliance Act in 2010, which came into effect at the beginning of 2014, the game changed entirely.

For the first time, it made any foreign firm serving as a platform to US clients responsible for identifying and reporting US account holders to the IRS.

If the firms refused to comply, Uncle Sam would come down hard by effectively locking them out of the US dollar system through a potential profit-gutting 30% tax.

Not wanting to deal with such a draconian law, many platforms exited the US market. For a few years, it was very, very difficult to serve US clients living in the US.

Eventually, things started to settle and the rules became clearer. More than a decade later, the business has changed permanently. There aren’t as many options as there once was, but at least there are options again.

Quite good ones actually.

But what you can access, and how, depends a lot on the asset class in question. So let’s spend the rest of our time together today running through the list…

International Bonds:

Accessed mainly through a managed investment account. Assets are typically custodied in a foreign bank and managed by an international asset manager registered with the SEC. That manager also provides the US compliance layer.

International Equities:

Accessed through a managed investment account in the same way as above.

International Funds (mutual, ETFs, hedge, etc.):

Rarely recommended for US clients outside of retirement accounts. But when it happens, access is provided in the same way as international bonds or equities.

Foreign Currencies (direct holding):

Usually accessed through a direct relationship with a foreign bank that offers a menu of currencies. For clients with an asset management mandate, this service is provided by the bank that holds the securities.

Some people also use US-based fintechs (like Wise as covered previously) for day-to-day foreign cash needs. But this isn’t true diversification in the way we mean it; it’s a US-based option to hold foreign currency.

International Precious Metals (physical gold, silver, platinum):

Because physical metals are not generally considered a security, the rules aren’t as strict as they are with bonds, stocks, or funds, or cash held in a foreign bank.

As a result, there are more firms willing to serve US clients. You’ll find groups offering everything from unallocated (i.e. a claim on a pooled account of physical gold) through to segregated vaulting (your holdings are held in a separate box that only you have access to). Perhaps because regulations are lighter, there are also more fly-by-night outfits unfortunately.

International Real Estate:

Your ability to buy (and through which structure) varies greatly depending on which country you buy in. But in general, unless the country in question restricts foreign ownership, you can invest whatever and however you want.

Cryptocurrency:

At this time, we’re not aware of any foreign custodian service (like Coinbase, Kraken, and others) willing to accept US clients. To hold “foreign” crypto, you’ll need to put it into cold storage and deposit that physical key in a foreign vault.

So there you have it.

As you can see, with the arguable exception of crypto – where the rules are still very much in flux – there’s a path forward. What works for you will depend on a number of factors beyond the scope of today’s piece including your goals, how much you have to work with, and any constraints unique to your situation.

P.S. If you’re thinking about dollar diversification and wondering how this might fit into your larger plan, feel free to get in touch. We have a reputation for bluntness… If what you’re trying to do will work, we’ll let you know. If not, we’ll let you know that too. You can book in a complimentary call with an associate here.